The Economic Report of the President, released Thursday, frames Barack Obama’s agenda to overhaul the corporate-tax code, boost infrastructure spending, approve new trade agreements and improve worker-friendly labor policies as the best way to boost the nation’s economic output and productivity. Read More »

The White House’s Council of Economic Adviserspublished a report this morning arguing that most of the decline in the labor force participation rate can be attributed to the aging of the Baby Boomers. But, they estimate, there’s still a little over 1 million people who might be drawn back into the labor force if the economy improves.

At a press briefing this afternoon, Betsey Stevenson, one of the members of the CEA, offered up a stylized story about how people who have dropped out can be drawn back into the labor market when the economy gets hot and job turnover, in particular, picks up. The story does a nice job explaining how a robust labor market with lots of hiring could potentially pull more and more people back into the work force: Read More »

–Lies and Statistics: Betsey Stevenson and Justin Wolfers offer six ways to separate lies from statistics. “So how can non-experts and policy makers separate the useful research from the dross? Allow us to offer six rules. 1. Focus on how robust a finding is, meaning that different ways of looking at the evidence point to the same conclusion. Do the same patterns repeat in many data sets, in different countries, industries or eras? Are the findings fragile, changing as one makes small changes in how phenomena are measured, and do the results depend on whether particularly influential observations are included? Thanks to Moore’s Law of increasing computing power, it has never been easier or cheaper to assess, test and retest an interesting finding. If the author hasn’t made a convincing case, then don’t be convinced.”

–North Dakota:Timothy Taylor looks at Labor Department research on employment in North Dakota. “On one level, maybe the most important level, the economic news from the Bakken area seems to me very positive. People have jobs! People are getting higher wages! Many of those jobs are for blue-collar skills that have not been well-rewarded in the U.S. economy in recent years. Sure, there are environmental issues worth discussing, but they can be managed. In addition, I’m sure the jobs and wages in the Bakken area are also supporting jobs and wages in other areas for suppliers, transporters, and energy users. Expanded energy production offers a real opportunity for jobs and growth in the U.S. economy, at a time when such opportunities are not thick on the ground. That said, it clearly lacks numerical perspective silly to say that America’s unemployed should all be headed for Williston, North Dakota. The boom from 2007-2011 added less than 30,000 jobs in this area, while the U.S. economy has about 11.7 million unemployed people.”

–Inflation:Cardiff Garcia looks at the difference between two key inflation measures. “During one of his pressers, Bernanke gave a spirited defense of using PCE rather than CPI mainly because of the last two items cited above — PCE inclusion of “all-in” health care costs (not just those out of pocket), and CPI’s greater share given to housing inflation, which is imputed (“made-up numbers” to use Bernanke’s words). Still, TIPS payouts are based on CPI, so it’s possible for a higher CPI to affect a popular market-based measure of inflation expectations — and thus to affect policy despite PCE being the Fed’s preferred measure. But at the moment the gap doesn’t much matter for policy because of other, simpler factors.” Read More »

The Duchess of Windsor, who quipped, “You can never be too rich or too thin,” appears to have had it at least half right. New research by University of Michigan economists Betsey Stevenson and Justin Wolfers found that for rich and poor alike, as income climbs, so does one’s sense of well-being.

Their findings, to be published in the May 2013 American Economic Review, Papers and Proceedings, counter the idea that once certain basic needs are met, a rising income doesn’t translate into commensurate surges in happiness. That 1970s-era notion, named for economist Richard Easterlin and known as the Easterlin Paradox, holds that higher average income doesn’t translate into greater average happiness. Stevenson and Wolfers noted that other researchers — but not Mr. Easterlin — tweaked the paradox to say that it holds after a certain threshold income level — to take care of one’s basic needs — is met. Read More »

–Discouraging Work, Saving:Gene Steuerle looks at how some tax and transfer programs discourage work and saving. ” Economists and many policymakers generally agree that our tax and transfer systems should promote opportunity, work, saving, and education rather than consumption. The problem is these programs often penalize people for earning that extra dollar of income. Rather than promoting work and savings, these implicit taxes punish such otherwise positive behavior. These penalties occur in TANF (formerly welfare), SNAP (formerly Food Stamps), Medicaid, the new health exchange subsidy, Pell grants, student loans, and unemployment compensation. The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.”

–Potential Output:Brad DeLong charts the change in potential output before and after the recession. “Looking at this graph tells me that: Real GDP fell relative to potential output by 8% in 2008-2009… Real has stayed 8% below its previous growth path ever since… The CBO is now forecasting that real GDP will return to potential output as of the end of 2017… The CBO is now forecasting that, come the end of 2017, the economy's full-employment productive potential will be 8% below what CBO was forecasting in 2007… Suppose we attribute the slowdown in the growth of the economy's productive potential to the impact of the downturn–to diminished risk-taking, slack investment, and unemployed workers losing and not acquiring skills. And what else could it be due to? That means that staying an average of 4% below potential GDP for nine years–a cumulative shortfall output gap of 36 percentage point-years–reduces potential GDP by 8%… In the reduced-form model that DeLong and Summers presented in 2012 at the Brookings Panel on Economic Activity, that is a value of η of 0.22–one that puts us in the very unusual situation (that I do not believe the U.S. has ever been before, and do not believe I will ever see again) in which attempts to reduce the budget deficit today by cutting spending now actually make the long-run deficit and debt problem arose.” Joe Weisenthal presents an even more depressing chart from the euro zone, via economist Philippe Waechter of Natixis.

–Economics of Love:Betsey Stevenson and Justin Wolfers dive into the economics of love for Valentine's Day. “The good news: Ours is a loving world. On a typical day, about 70 percent of people worldwide reported a love-filled day. In the U.S., 81 percent felt love, as did 81 percent of Canadians and 79 percent of Italians. Germany and the U.K. were less loving, with slightly less than 3 in 4 people reporting feeling loved. Surprisingly, the same was true of the supposedly romantic French. And if you’re in Japan, please hug someone: Only 59 percent of Japanese said they had experienced love the previous day.” Read More »

–Tax Reform:Justin Wolfers and Betsey Stevenson say the time is ripe to design a better tax system. “Imagine if simple economic insights were used to give us a better system. What would it look like? One important insight is that there’s no difference, economically speaking, between the government giving you an extra dollar or choosing to tax away one fewer dollar. Yet the budget process treats the two very differently. If the government wants to send you a regular check, it must first obtain the funds through an appropriations bill subject to annual scrutiny. If the government wants to spend money by giving you a tax break, the expenditure need only be approved once. The result is a complex tax code riddled with ineffective tax preferences for a mind-boggling array of activities. A better system would require Congress to reauthorize each tax expenditure annually, a reform that would help eliminate wasteful loopholes and simplify the system. Just capping deductions at $25,000, as lawmakers are currently considering doing, isn’t enough. It’s Congress at its least courageous, refusing to ask the harder question of which tax breaks make sense.”

–Tax Receipts:Menzie Chinn charts how government expenditures compare with tax receipts. “[Recepits are] stabilizing at extremely low levels. To place matters in perspective, note that even before 2008, tax revenues were low by historical standards. That was due to tax reductions passed in 2001 and 2003 (EGTRRA and JGTRRA), which helped overheat the economy in 2006-07. In the wake of the second Bush recession, low tax receipts and high expenditures (i.e., a deficit) is an outcome of the attempt to stimulate the economy particularly in the depth of the great recession, either through direct discretionary measures (e.g., ARRA) and automatic stabilizers. Interestingly, while receipts are rising, spending is falling even faster.”

–U.S. Firms, European Taxes:Peter Gumbel examines how U.S. companies keep their European tax bills low. “Britain is a huge market for Amazon, the U.S. online retailing giant, accounting for as much as 25% of its total sales outside the United States, or more than $5 billion annually. The company also employs about 15,000 staff in the U.K. But it paid less than $3 million in tax to the British Inland Revenue last year. How so? Because Amazon’s main European operations are incorporated in the Grand Duchy of Luxembourg, a speck on the European map which, like Britain, is a member of the European Union – but which for years has done a roaring business by offering foreign companies extremely low tax rates. By being based there, Amazon reports only about $330 million in revenue in the U.K. – compared with almost $12 billion in Luxembourg, where its taxes came to just $10.7 million. That’s a rate of just 0.009%. Amazon can do this because its U.K. arm is registered as a service company for the Luxembourg holding company, Amazon EU SARL.” Read More »

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